René M. Stulz

The Determinants of Firms' Hedging Policies

We develop a positive theory of the hedging behavior of value-maximizing corporations. We treat hedging by corporations simply as one part of the firms financing decisions. We examine (1) taxes, (2) contracting costs, and (3) the impact of hedging policy on the firms investment decisions as explanations of the observed wide diversity of hedging practices among large, widely-held corporations. Our theory provides answers to the questions: (1) why some firms hedge and others do not; (2) why firms hedge some risks but not others; and (3) why some firms hedge their accounting risk exposure while others hedge their economic value.

The determinants and implications of corporate cash holdings

Abstract We examine the determinants and implications of holdings of cash and marketable securities by publicly traded U.S. firms in the 1971–1994 period. In time-series and cross-section tests, we find evidence supportive of a static tradeoff model of cash holdings. In particular, firms with strong growth opportunities and riskier cash flows hold relatively high ratios of cash to total non-cash assets. Firms that have the greatest access to the capital markets, such as large firms and those with high credit ratings, tend to hold lower ratios of cash to total non-cash assets. At the same time, however, we find evidence that firms that do well tend to accumulate more cash than predicted by the static tradeoff model where managers maximize shareholder wealth. There is little evidence that excess cash has a large short-run impact on capital expenditures, acquisition spending, and payouts to shareholders. The main reason that firms experience large changes in excess cash is the occurrence of operating losses.

Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan

This paper uses data on foreign stock ownership in Japan from 1975 to 1991 to examine the determinants of the home bias in portfolio holdings. Existing models of international portfolio choice predicting that foreign investors hold national market portfolios or portfolios tilted towards high expected return stocks are inconsistent with the evidence provided in this paper. We document that foreign investors overweight shares of firms in manufacturing industries, large firms, firms with good accounting performance, firms with low unsystematic risk, and firms with low leverage. Controlling for size, there is evidence that small firms that export more have greater foreign ownership. Foreign investors do not perform significantly worse than if they held the Japanese market portfolio, however. After controlling for firm size, there is no evidence that foreign ownership is related to expected returns of shares. We show that a model with size-based informational asymmetries and deadweight costs can yield asset allocations consistent with our evidence.

Why are Foreign Firms Listed in the U.S. Worth More

At the end of 1997, the foreign companies listed in the U.S. have a Tobins q ratio that exceeds by 16.5% the q ratio of firms from the same country that are not listed in the U.S. The valuation difference is statistically significant and largest for exchange-listed firms, where it reaches 37%. The difference persists even after controlling for a number of firm and country characteristics. We propose a theory that explains this valuation difference. We hypothesize that controlling shareholders of firms listed in the U.S. cannot extract as many private benefits from control compared to controlling shareholders of firms not listed in the U.S., but that their firms are better able to take advantage of growth opportunities. Consequently, the cross-listed firms should be those firms where the interests of the controlling shareholder are better aligned with the interests of other shareholders. The growth opportunities of cross-listed firms will be more highly valued than those of firms not listed in the U.S. both because cross-listed firms are better able to take advantage of these opportunities and because a smaller fraction of the cash flow of these firms is expropriated by controlling shareholders. We find that our theory explains the greater valuation of cross-listed firms. In particular, we find expected sales growth is valued more highly for firms listed in the U.S. and that this effect is greater for firms from countries with poorer investor rights.

Culture, openness, and finance

Religions have little to say about shareholders but have much to say about creditors. We find that the origin of a countrys legal system is more important than its religion and language in explaining shareholder rights. However, a countrys principal religion helps predict the cross-sectional variation in creditor rights better than a countrys openness to international trade, its language, its income per capita, or the origin of its legal system. Catholic countries protect the rights of creditors less than other countries, and long-term debt is less important in these countries. A countrys openness to international trade mitigates the influence of religion on creditor rights. Religion and language are also important predictors of how countries enforce rights.

A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns

The free cash flow hypothesis advanced by Jensen (1988) states that managers endowed with free cash flow will invest it in negative net present value (NPV) projects rather than pay it out to shareholders. Jensen defines free cash flow as cash flow left after the firm has invested in all available positive NPV projects. In this paper, we test this hypothesis on a sample of large investments made by firms, namely decisions to acquire control of other firms through tender offers.

Managerial Performance, Tobin's Q, and the Gains from Successful Tender Offers

A honeycomb sandwich cast for supporting human or animal body portions. The cast has inner and outer cast layers which, in the finished cast, are rigid, and a central honeycomb core having honeycomb cells which are perpendicular to the skin of the underlying body portion. The honeycomb is securely attached, e.g., mechanically locked or bonded to the cast layers to form an integral, high strength, low weight honeycomb structure. An indentable, resiliently compressible fabric such as reticulated plastic foam may optionally be positioned between the faces of the honeycomb core and the cast layers. With use of such a foam, when the outer layer is applied normally by wrapping a bandage-like fabric about the body portion and the surrounding honeycomb core, a compressive force is generated which presses portions of the foam structure into the honeycomb cell openings to form a more secure interlock and prevent relative movement between the components of the cast. The foam structure can subsequently be rigidified to form a mechanical interlock between it and the honeycomb.

Are Internal capital Markets Efficient

Using segment information from Compustat, we find that the investment by a segment of a diversified firm depends on the cash flow of the firms other segments, but significantly less than it depends on its own cash flow. The investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single-segment firms. The sensitivity of a segments investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firms other segments.

Optimal Hedging Policies

This paper makes contributions in two directions. First, the paper presents a model in which value-maximizing firms pursue active hedging policies. Second, the paper derives optimal hedging policies for risk-averse agents. Whereas the methodology used and the results provided are quite general, this paper deliberately focuses the analysis on hedging foreign exchange exposure through forward contracts on foreign currencies. This emphasis is explained by the fact that hedging foreign currency exposure through forward contracts has been a topic of considerable interest in recent years.

Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory

Consistent with a lifecycle theory of dividends, the fraction of publicly traded industrial firms that pays dividends is high when retained earnings are a large portion of total equity (and of total assets) and falls to near zero when most equity is contributed rather than earned. We observe a highly significant relation between the decision to pay dividends and the earned/contributed capital mix, controlling for profitability, growth, firm size, leverage, cash balances, and dividend history, a relation that also holds for dividend initiations and omissions. In our regressions, the mix of earned/contributed capital has a quantitatively greater impact than measures of profitability and growth opportunities. We document a massive increase in firms with negative retained earnings (from 11.8% of industrials in 1978 to 50.2% in 2002). Controlling for the earned/contributed capital mix, firms with negative retained earnings show virtually no change in their propensity to pay dividends from the mid-1970s to 2002, while those whose earned equity makes them reasonable candidates to pay dividends have a propensity reduction that is twice the overall reduction in Fama and French (2001). All our evidence supports the lifecycle theory of dividends, in which a firms stage in that cycle is well-proxied by its mix of internal and external capital.